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February 22, 2012

Larger Bank of England Stimulus Was Overridden

Majority felt it would cause alarm, restricted amount

Two of the nine members of the Bank of England’s Monetary Policy Committee were outvoted at the committees last meeting when they sought to boost its stimulus to 75 billion pounds ($118 billion). The majority was concerned that such a move would cause alarm over the state of the economy and make it appear weaker than it was.

Bloomberg reported Wednesday that, in minutes released from the BoE meeting of Feb. 8-9, Adam Posen and David Miles proposed that, instead of a stimulus increase of 50 billion pounds to bring the overall amount to 325 billion pounds, a package of 75 billion pounds be authorized instead.

However, according to the minutes, the other members said that such a move “risked sending a signal that the committee thought the economic situation was weaker than it was.” The seven argued that “Recent data on the domestic and international economies had on balance been more positive than might have been anticipated towards the end of 2011, pointing to the possibility that growth might be stronger than expected in the near term.”

Posen and Miles had argued for the larger amount of 75 billion pounds of quantitative easing because of “the considerable margin of spare capacity remaining in the economy and the extent of deleveraging still likely to be required,” according to the minutes. They also said there was risk of a “prolonged period of depressed demand causing inflation to fall materially below” the 2% target rate set by the central bank.

QE was expanded in February after figures showed that the economy shrank in Q4 as consumers tightened their belts and the eurozone debt crisis escalated. On Wednesday the MPC said that, despite expected near-term “volatile” growth, the pace of expansion should “strengthen gradually” beginning later in the year. All nine members agreed that the benchmark interest rate should be maintained at its current record low of 0.5%.

According to the minutes, some members also feel that the probability of inflation exceeding the central bank’s target was “slightly higher than shown in the projection” in the Inflation Report issued by BoE last week. Those members argued that a “case could be made for maintaining the stance of policy at this meeting.”

Victoria Cadman, an economist at Investec Securities in London, was quoted saying, “This leaves the door open for more QE. We’re looking for another 50 billion pounds in May, and after that we don’t see any more as the economy picks up in the second half.”